Quantitative Easing
It is a tool that central banks use to inject money directly into the economy. Money is either physical, like bank notes, or digital, like the money in bank accounts. Quantitative easing, mostly, involves creating digital money. The central banks use this money to buy things like government debt (mostly T-Bills, T-Notes and T-Bonds). Quantitative easing is also sometimes referred to as “Asset Purchase”.
The central banks are tasked to keep inflation in check. Usually, they are required to keep the inflation at a target inflation rate set by their governments. Inflation in an economy can be influenced by changing Bank Rate (the interest rate which the central bank pays to banks on the reserves held by them with the central bank). However, sometimes changing bank rate itself is not sufficient to influence inflation. During the global financial recession of 2008, some central banks have reduced the bank rate to very low levels (For example, the Bank of England reduced the Bank Rate from 5% to 0.5%) to support economic recovery. Lower interest rate means its cheaper for households and businesses to borrow money – which encourages them to spend and invest, whether that’s a family buying a new car or a company wanting to build a new factory. But there’s a limit to how low interest rates can go. Thus, most central banks (whose economies faced the global financial recession of 2008) resorted to quantitative easing as a monetary policy tool to induce more money into the economic system. The idea was that if banks had more money with them then they will most or some of it to households and businesses.
How does quantitative easing work?
Under quantitative easing, the central banks create new money (mostly digital) and use it to purchase government bonds from banks. The large-scale purchase of government bonds increases the bond prices and reduces its yield (interest rate). This, indirectly, pushes down the interest rates offered on loans (e.g. mortgages or business loans) because rates on government bonds tend to affect other interest rates in the economy.
Thus, quantitative easing makes it cheaper for households and businesses to borrow money and encourage spending.
In addition, quantitative easing can stimulate the economy by boosting a wide range of financial asset prices. Suppose that a central bank buys $1 million of government bonds from a pension fund. In place of the bonds, the pension fund now has $1 million in money. Rather than hold on to this money, it might invest it in financial assets, such as more bonds or shares, that give it a higher return. And when demand for financial assets is high, with more people wanting to buy them, the value of these assets increases. This makes businesses and households holding shares wealthier – making them more likely to spend more, boosting economic activity. Simultaneously, with more money with institutions such as pension funds, who will try to invest this money in bonds or shares, businesses may be interested to borrow this money by issuing bonds or shares, which will in-turn invest it in new businesses or expanding existing businesses thereby creating more jobs, exports and increasing economic growth.
Where to central banks get the funds to purchase these assets?
They simply create it out of thin air. This is what is referred to as “printing money”, though in real no physical money is printed; what is created is digital money in the form of central bank reserves. The greater the supply of money in an economy, the lower the corresponding interest rates are. In turn, lower rates allow banks to make more loans. Increased lending stimulates demand by giving business money to expand and individual’s money to buy things like homes, cars, etc.
By increasing the money supply, the value of the currency is kept low. This makes the country’s stocks, goods and services more attractive to foreign investors.
How much quantitative easing has been done in countries affected by GFC?
Quantitative easing is done in phases spread across years. The following shows the quantitative easing done by some developed countries.
United Kingdom
| Year |
Amount Induced |
| 2009 |
£ 200 billion |
| 2012 |
£ 375 billion |
| 2016 |
£ 435 billion |
| Total |
£ 1.1 trillion |
United States
| Year |
Amount Induced |
| 2009 |
$ 2.38 trillion |
| 2011 |
$ 600 billion |
| 2013 |
$ 380 billion |
| 2014 |
$ 1.14 trillion |
| Total |
$ 4.5 trillion |
Japan
| Year |
Amount Induced |
| 1997 |
¥ 50.8 trillion |
| 2004 |
¥ 35.5 trillion |
| 2013 |
¥ 80 trillion |
| Total |
¥ 166.3 trillion |
European Central Bank
| Year |
Amount Induced |
| 2015 |
€ 600 billion |
| 2016 |
€ 900 billion |
| 2017 |
€ 780 billion |
| 2018 |
€ 240 billion |
| Total |
€ 2.520 trillion |
Side-effects of quantitative easing (QE)
The following are some of the side-effects of quantitative easing.
- It fuels wealth inequality
- It promotes systemic risk
- It perpetuates an unsustainable debt-led economic model
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